Europe and Japan, more reliant on Middle Eastern oil than the US and engaged in profitable commerce with Iran, find themselves caught in the middle.

The situation reached a dangerous point this week when President Clinton signed into law a bill that would impose sanctions of varying severity on foreign companies that invest significantly in Iran or Libya. America's friends and allies in Europe, notably France and Germany, have threatened retaliatory sanctions via the European Union.

Whoa! Coming on the heels of a similar battle over US sanctions against European and Canadian firms investing in Cuba, this stiff-spined battle among friends threatens to return the US to the collision foreign policy of the early Clinton administration.

It's time for serious, quiet efforts to find a compromise among allies.

To start, France and Germany should recognize that they can, and should, do more to persuade Tehran to bargain seriously over ending its support for terrorist groups. For its part, Washington (Congress and the White House) ought to realize that strong-arm threats are going nowhere.

The Clinton administration should put its cards on the table via the Europeans. What hard proof would the US require from Iran so that it would end its support of terrorists in return for an end of US containment? What steps could pave the way toward resumption of US investment in oil exploration and development? (One possibility: real Iranian aid on a settlement with Hizbullah in Lebanon?)

Since parliamentary elections last spring, Iran has intensified the struggle over modifying its absolutist Khomeini revolution. It's time for the US and Europe to seek common ground in helping that process along.